## EXECUTIVE SUMMARY

## Source details

**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082812.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082812.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082812.pdf.json)

---

### Overview and strategic rationale
- Paper outlines strategic priorities for the IMF’s financial surveillance and complements recent work-agenda discussions.
- Purpose: strengthen financial surveillance so the Fund can fulfill its mandate to ensure effective operation of the international monetary system and support global economic and financial stability.
- Strategy is ambitious but focused to ensure scarce resources are used efficiently and effectively.
- Rationale: systemic risk has become more complex, propagating rapidly through highly interconnected financial systems and across economies; Fund must better identify macrofinancial risks (credit booms and busts, balance sheet fragility) to inform policy advice nationally and multilaterally.

### Three-pronged strategy (summary)
- (i) Strengthen the analytical underpinnings of macrofinancial risk assessments and policy advice.
- (ii) Upgrade the instruments and products of financial surveillance to foster an integrated policy response to risks.
- (iii) Engage more actively with stakeholders to improve traction and impact of financial surveillance.

### Progress to date: innovations and adaptations
- Analytical toolkit:
  - Macrofinancial models developed by Fund staff help identify sources of systemic risks, unravel global and within-country linkages, and analyze spillovers across borders.
  - Toolkit strengthened in financial sector vulnerabilities, macrofinancial linkages, and cross-border dimensions and global risks.
- Instruments and products:
  - Article IV reports now contain substantive discussions of financial sector issues and deeper analysis of vulnerabilities with greater emphasis on cross-border spillovers.
  - Financial Sector Assessment Program (FSAP) made more focused with modular FSAPs in 2010 and mandatory FSAPs for 25 jurisdictions deemed systemically important (S25) in 2011.
  - Global Financial Stability Report (GFSR) increased analytical depth, candor, and reach.
  - Vulnerability Exercise extended: started 2001 (emerging economies), extended to advanced economies in 2009, and to low-income countries in 2011.
  - Since 2009, IMF and FSB discuss Early Warning Exercise (EWE) results every six months with IMFC.
  - New products introduced, such as Spillovers Reports.
- Stakeholder engagement:
  - Fund intensified contributions to global financial policy reform through participation in FSB and standard-setting bodies, bringing macrofinancial linkages and cross-country experience into G20 and FSB discussions.

### Remaining gaps and diagnostic findings
- Independent evaluations (2011 TSR and IEO 2011) identified shortcomings:
  - Analytical underpinnings of financial sector surveillance and related risk assessments need bolstering to keep pace with market innovations.
  - In some cases, Fund messages on identified risks or policy implications were not sufficiently clear, consistent, or candid.
  - Accurate risk assessments and alarms were sometimes not acted upon by policymakers, indicating weak traction.
- Traction is uneven: higher for program than non-program countries, declines with income level, and is lower for G20 than for non-G20 countries.

### Action 1 — Improve risk identification and macrofinancial policy analysis
- Advance analytical frontiers:
  - Traditional models (Polak-derived in-house macroeconomic monetary model) have been the workhorse for well over 50 years but are increasingly challenged by complex macrofinancial feedbacks.
  - Need new analytical frameworks to capture interdependencies of real-financial sectors within and across countries, cross-risk correlations, default dependencies, and other non-linearities in stress periods.
  - While building unified macrofinancial frameworks continues, developing “best practices” on policy responses, institutional frameworks, and implementation remains central in the interim.
- Implementation horizon and expectations:
  - Over the next three to five years the Fund may not be able to prevent systemic crises but will:
    - Improve capacity to sound alarms early.
    - Help policymakers make the global financial system safer.
    - Mitigate crises when they materialize.
  - Management and the Executive Board mechanisms will monitor progress and alignment with surveillance goals.

### Specific policy areas for in-depth analysis (selected priorities)
- Macroprudential, macroeconomic, and microprudential policy interactions:
  - Objective: understand interactions and potential costs/side effects.
  - Policy agenda: (a) enhance complementarity between monetary, macroprudential, and microprudential policies; (b) identify tools that minimize side effects and negative spillovers; (c) propose institutional arrangements assuring governance and accountability.
  - Lead: MCM and RES. Priority and timing: High, Short-term. Additional resource needs: None.
- Comprehensive approach to managing capital flows:
  - Objective: develop comprehensive, balanced, flexible approach covering inflows/outflows, liberalization, and multilateral dimensions.
  - Deliverable: institutional approach based on existing analysis and country experiences.
  - Lead: SPR, with MCM and RES. Priority and timing: High, Short-term. Additional resource needs: None.
- Containing sovereign-bank feedback loops and preventing excessive global deleveraging:
  - Immediate focus: restore euro area financial stability by diagnosing and repairing balance sheets, assisting restructuring, and providing analytical support for banking union efforts.
  - Lead: MCM, SPR, and (where relevant) FAD. Priority and timing: High, Short-term. Additional resource needs: None.
- Assessing implications of ongoing global regulatory reforms (G-SIFIs, shadow banking, OTC derivatives):
  - Role: provide independent advice and assess impact on international monetary system; monitor unintended regulatory spillovers and arbitrage.
  - Lead: MCM with RES. Priority and timing: High, Short- to medium-term. Additional resource needs: None.
- Cross-border linkages and spillovers:
  - Objective: quantify transmission of macroeconomic or financial shocks across borders and sectors; analyze clusters and offshore/financial hub surveillance.
  - Lead: MCM, RES, and SPR. Priority and timing: High, Short- to medium-term. Additional resource needs: None.
- Role and effectiveness of monetary policy in the downturn:
  - Issue: persistently low or negative interest rates, low growth, and high unemployment challenge monetary policy conduct.
  - Lead: MCM and RES. Priority and timing: Medium, Short-term. Additional resource needs: None.
- Sustainable financial deepening in shallow financial systems:
  - Objective: facilitate well-managed financial deepening in emerging market and low-income countries; collaborate with World Bank.
  - Lead: ADs, with MCM, RES, and SPR. Priority and timing: Medium, Short- to medium-term. Additional resource needs: None.
- Exit from extraordinary macrofinancial policies:
  - Objective: assist members in exit strategies (e.g., quantitative monetary easing) to avoid new distortions or ill-timed exits.
  - Lead: ADs, with MCM, RES, and SPR. Priority and timing: Medium, Medium-term. Additional resource needs: None.

### Action 2 — Innovate and foster an integrated view of financial sector risks
- Main objective: systematically integrate risk assessments across multilateral and bilateral Fund products (GFSR, WEO, Fiscal Monitor, Article IV reports, FSAPs, spillover reports).
- Measures to ensure integration in Article IV consultations:
  - Incorporate multilateral product analysis into bilateral policy recommendations.
  - Prepare a list of key global risks and their probabilities; country teams to consider domestic transmission and spillovers.
  - Ensure FSAP recommendations are followed up and reported in Article IV consultations.
  - Pilot studies in low-income countries on financial deepening, policy effectiveness, and volatility.
  - Greater follow-up on financial sector data quality and coverage.
  - Cross-departmental cooperation and assignment of financial sector experts to all S25 teams.
  - Enhance coverage of financial spillovers in Article IV consultations following the 2012 Integrated Surveillance Decision.
- FSAP frequency and synergies with Article IVs:
  - Conduct higher frequency FSAPs or FSAP stability modules for countries that request them and are deemed vulnerable.
  - Consider dedicated discussions of FSSA issues in Article IV board discussions for S25 countries.
- Deepen culture of integrated risk analysis:
  - Consider developing a global risk map to operationalize two-way integration of multilateral and bilateral risk analysis and identify risk build-ups across sectors, borders, clusters, and time.
- Move towards cluster-level surveillance:
  - Network analysis identified clusters of interconnected countries with offshore centers or global hubs acting as “gatekeepers”; more surveillance could be conducted at cluster level.
- Lead roles: ADs, MCM, RES, SPR, FAD. Priority: High for strengthening financial surveillance within Article IV consultations. Timing: Short- to medium-term. Additional resource needs: Yes (for some items).

### Action 3 — Increase traction by engaging more actively with stakeholders
- Strategic aim: translate analytical findings into actionable policies and best practices, promote policy dialogue on systemic issues, “speak truth to power,” and engage national authorities, multilateral bodies, private sector, and macrofinancial risk bodies.
- Specific activities:
  - Serve as global facilitator on macroprudential policy by convening academics, practitioners, and authorities (high-level meetings or technical working groups/taskforces).
  - Promote coordination between macroeconomic policymakers and microprudential supervisors.
  - Contribute to global regulatory reform leveraging Fund’s standards assessment experience and near-universal membership; participate in FSB and SSBs.
  - Deepen collaboration with World Bank on financial sector work for LICs via the Financial Sector Liaison Committee (FSLC).
  - Maintain and deepen momentum for filling data gaps on financial soundness, national and cross-border interconnectedness in coordination with FSB and IAG under the 2009 G20/IMFC Data Gaps Initiative (DGI).
  - Engage with newly created systemic risk authorities; develop Fund role as global systemic risk advisor.
- Lead departments: MCM, RES, SPR, EXR, LEG, STA, ADs. Priorities range from High to Medium; horizons Short- to medium-term.

### Data initiatives and timelines (Box 1 — G-SIFIs)
- Final templates targeted for completion by end-2012, including institution-to-aggregate (I-A) data templates.
- Memorandum of Understanding expected to be signed by participating authorities by end-2012, including governance arrangements for data sharing.
- First phase of data collection and sharing among supervisors to begin in March 2013.
- Fund access to G-SIFI data: Fund’s Articles of Agreement require members to provide information necessary for surveillance but do not oblige disclosure “in such detail that the affairs of individuals or corporations are disclosed.” Member countries frequently share confidential supervisory data with the Fund on a voluntary basis in FSAPs; within the FSB initiative extension of data sharing to other official sector bodies (including the Fund) will be decided in early 2013.

### Implementation priorities, time horizons, and resource implications (selected entries)
- Time horizon definitions:
  - Short-term: up to two years.
  - Medium-term: up to five-years.
- Selected entries (priority — time horizon — additional resource needs — lead responsibility):
  - Deepen analysis of macroprudential policies — High — Short-term — None — MCM and RES.
  - Develop a comprehensive approach to managing capital flows — High — Short-term — None — SPR, with MCM and RES.
  - Advise on policies to contain sovereign-bank feedback loops — High — Short-term — None — MCM, SPR, and (where relevant) FAD.
  - Deepen analysis of cross-border linkages — High — Short- to medium-term — None — MCM, RES, and SPR.
  - Assess implications of regulatory reform — High — Short- to medium-term — None — MCM with RES.
  - Strengthen financial surveillance within Article IV consultations — High — Short- to medium-term — Yes — ADs with MCM.
  - Conduct more frequent FSAPs for vulnerable countries and LICs — High — Short- to medium-term — Yes — MCM.
  - Serve as the global facilitator on macroprudential policy — High — Short-term — Marginal — MCM and RES, with EXR.
  - Address data gaps and improve data provision — High — Medium-term — Depends on modalities — MCM, SPR, and STA.
- Footnote: “None” means existing resources will be reprioritized, or processes or products will be streamlined. Area departments (ADs) play a key role given operational experience.

### Costs to implement proposed actions (exact figures preserved)
- Strengthening and mainstreaming financial surveillance in Article IV consultations:
  - Initial incremental need: of the order of 20–30 FTEs, at a cost of about $7–10½ million per annum.
  - Steady-state level thereafter: around 10-15 FTEs (or $3½–5¼ million) per annum.
- Increasing the frequency of FSAPs to vulnerable countries:
  - Present capacity: 15–20 FSAP assessments per annum.
  - Assumed increase: three to five additional assessments per annum.
  - Additional resources needed: approximately $4–6 million per annum.
  - Effect on frequency: increase of three to five FSAPs per annum would allow frequency for non S25 countries to rise from (on average) once in every 11–16 years to once in every 8–13 years.
- Increasing traction by engaging more actively with stakeholders:
  - Scaling up outreach activities, including for travel, could be of the order of up to an additional $1 million per annum.

### Major challenges in implementing the strategy
- Developing a unified theory for macrofinancial linkages is a long-term endeavor; meanwhile, the Fund will build on multiple analytical approaches.
- Empirical analysis on systemic risk faces enormous data gaps.
- Reliance on cooperative persuasion to gain traction in surveillance.
- High and rising demands on Fund services while resources are limited.
- Without greater traction with key stakeholders the Fund cannot perform its role effectively.
- No comprehensive model yet properly captures complex real–financial linkages; empirical estimates are uncertain.
- Partial equilibrium models and sectoral studies provide insights but not comprehensive quantitative policy guidance.

### Accountability, monitoring, and reviews
- Responsibility is shared across the Fund; lead roles include:
  - MCM: lead on financial stability, macroprudential and microprudential policies, capital market developments; supports Article IV teams and conducts FSAPs.
  - RES and SPR: lead analytical work on vulnerabilities, macrofinancial linkages, and ensure Article IV reports integrate financial sector issues and follow up on FSAP recommendations.
  - LEG: legal expertise on financial sector issues.
  - ADs: shape policy lines in bilateral surveillance and liaise with national authorities.
  - EXR: supports effective communication and outreach.
  - STA: leads in closing key data gaps.
- Accountability framework:
  - Management established a new accountability framework to review departmental objective alignment with the strategy.
  - Executive Board review opportunities: brief progress report for the Triennial Surveillance Review at the 2012 Annual Meetings; periodic reports to IMFC and the semi-annual work program; the 2014 FSAP Review and the 2014 Triennial Surveillance Review; opportunity to affirm importance of financial surveillance in the next medium-term budget.

### External expert consultation summary (selected messages)
- Fund should leverage analytical rigor, independence, cross-country experience, and rapid deployment capability.
- Analytical and policy priorities: systemic risk measurement, cross-border issues (capital flows, interconnectedness, opaque derivatives, cross-border resolution), macroprudential policy best practices, role of financial deepening, and FSAP-identified prudential supervision gaps.
- Instruments and products: greater integration between bilateral (Article IV) and multilateral (GFSR, EWE) work; bridge between annual surveillance and in-depth FSAPs.
- Engagement and traction: balance “telling truth to power” with being a trusted advisor; deliver early and sufficiently candid warnings; concise, digestible messaging needed for top decision makers.
- FSB/IMF roles: avoid duplication; FSB to lead regulatory design while Fund analyzes macroeconomic impacts and implementation.
- Interlocutors consulted included Montek Singh Ahluwalia, Agustín Carstens, Jaime Caruana, Charles Goodhart, Stefan Ingves, Simon Johnson, Tiff Macklem, Ravi Menon, Raghu Rajan, and Paul Tucker.

*International Monetary Fund — The IMF’s Financial Surveillance Strategy (082812)*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview
- This paper outlines strategic priorities for the IMF’s financial surveillance in the coming years and complements recent discussions on the work agenda in this area.
- It takes stock of innovations and gaps in financial surveillance by the Fund during the past decade, including in the wake of the current global financial crisis.
- It proposes concrete and prioritized steps to further strengthen financial surveillance so that the Fund can fulfill its mandate to ensure the effective operation of the international monetary system and support global economic and financial stability.
- The strategy builds on and consolidates the progress achieved to date. It is ambitious, but focused, so as to ensure that scarce resources are used efficiently and effectively.

### Three-pronged strategy (summary)
- The Fund proposes a three-pronged strategy:
  - (i) Strengthen the analytical underpinnings of macrofinancial risk assessments and policy advice.
  - (ii) Upgrade the instruments and products of financial surveillance to foster an integrated policy response to risks.
  - (iii) Engage more actively with stakeholders in order to improve the traction and impact of financial surveillance.

### Rationale for strengthening surveillance
- Systemic risk has become ever more complex, with shocks propagating rapidly through highly interconnected financial systems and across economies.
- The Fund needs to remain at the forefront of international efforts to better identify macrofinancial risks, such as credit booms and busts and balance sheet fragility, in order to inform its policy advice at the national and multilateral levels.

### Progress to date: innovations and adaptations
- Analytical toolkit:
  - Macrofinancial models are being created by Fund staff that help identify sources of systemic risks, unravel global and within-country linkages, and analyze spillovers across borders.
  - The Fund’s toolkit for systemic risk assessment has been strengthened in the areas of financial sector vulnerabilities, macrofinancial linkages, and cross-border dimensions and global risks.
- Instruments and products:
  - Article IV reports now contain substantive discussions of financial sector issues and deeper analysis of vulnerabilities, with greater emphasis on cross-border spillovers.
  - The Financial Sector Assessment Program (FSAP) was made more focused with the introduction of modular FSAPs in 2010 and mandatory FSAPs for 25 jurisdictions deemed to have systemically important financial sectors (S25) in 2011.
  - The Global Financial Stability Report (GFSR) has increased its analytical depth, candor, and reach.
  - The Vulnerability Exercise, which started in 2001 for emerging economies, was extended to advanced economies in 2009 and to low-income countries in 2011.
  - Since 2009, the IMF and FSB have discussed the results of an Early Warning Exercise (EWE) every six months with the IMF’s International Monetary and Financial Committee (IMFC).
  - New products, such as Spillovers Reports, have been introduced.
- Stakeholder engagement:
  - The Fund has intensified contributions to global financial policy reform through participation in key committees and working groups of the FSB and standard-setting bodies, and by bringing macrofinancial linkages and cross-country experience into discussions with the G20 and the FSB.

### Remaining gaps and diagnostic findings
- Independent evaluations (2011 TSR and IEO 2011) flagged shortcomings:
  - The analytical underpinnings of financial sector surveillance and related risk assessments needed further bolstering to keep pace with market innovations.
  - In some cases, the Fund did not deliver sufficiently clear, consistent, and candid messages on identified risks or their policy implications.
  - In certain instances, accurate risk assessments and appropriate alarms produced by the Fund were not acted upon by policy makers, indicating weak traction with national authorities and other stakeholders.
- Traction of surveillance is uneven: it is higher for program than non-program countries, declines with income level, and is lower for G20 than for non-G20 countries.

### Actions going forward (high-level)
- Maintain focus on three pillars: analysis, instruments/products, and stakeholder traction.
- Ensure continuity in areas of strength while bridging the identified gaps.

### Action 1 — Improve risk identification and macrofinancial policy analysis (detail)
- Advance the frontiers of analysis:
  - The in-house macroeconomic monetary model developed by Polak and others has been the workhorse of the IMF’s surveillance and lending activities for well over 50 years.
  - Current macrofinancial feedback effects have reached a level of complexity that is difficult to capture in traditional models, requiring new analytical frameworks to explore interdependencies of real-financial sectors within and across countries.
  - New analysis should help better identify and mitigate systemic risks, including analyzing cross-risk correlations, default dependencies, and other non-linearities in times of stress.
  - While efforts to build a unified macrofinancial framework are ongoing, developing “best practices” on policy responses, institutional frameworks, and their implementation will remain central in the interim.

### Implementation horizon and expectations
- Over the next three to five years, the Fund may not be able to prevent systemic crises, but it will continue to:
  - Improve its capacity to sound alarms early.
  - Help policymakers make the global financial system a safer place.
  - Mitigate crises when they do materialize.
- Mechanisms are in place to allow Management and the Executive Board to monitor progress and ensure changes align with the goals and objectives set for the Fund’s financial surveillance.

*082812 - EXECUTIVE SUMMARY, August 28, 2012*

### 14.      Specific policy areas identified for in-depth analysis in the period ahead are:

### 14.      Specific policy areas identified for in-depth analysis in the period ahead are:

### Macroprudential, macroeconomic, and microprudential policy interactions
- Objective: Make strides in understanding the interactions between macroprudential, macroeconomic (monetary/exchange rate and fiscal), and microprudential policies, as well as potential costs and side effects.
- Rationale: Financial stability cannot be assured without a macroprudential approach targeted at systemic risks to, or stemming from, the financial sector.
- Policy agenda:
  - (a) enhancing the complementarity between monetary, macroprudential, and microprudential policies;
  - (b) identifying policy tools that also minimize potential side effects and negative spillovers;
  - (c) proposing options with regard to institutional arrangements to assure adequate governance and accountability.
- Lead departments cited in Table 1 for deepening analysis of macroprudential policies: MCM and RES.
- Priority and timing from Table 1: High, Short-term, Additional resource needs: None.

### Comprehensive approach to managing capital flows
- Objective: Develop a comprehensive, balanced, and flexible approach to managing capital flows covering inflows and outflows, liberalization of capital flows, and multilateral dimensions of policies affecting capital flows.
- Deliverable: An institutional approach proposed on the basis of existing analysis and country experiences (as called for by the IMFC).
- Lead departments cited in Table 1: SPR, with MCM and RES.
- Priority and timing from Table 1: High, Short-term, Additional resource needs: None.

### Containing sovereign-bank feedback loops and preventing excessive global deleveraging
- Immediate area of attention: Help restore financial stability in the euro area by diagnosing and repairing financial sector balance sheets, assisting restructuring, and providing analytical support for efforts to build a banking union.
- Other objectives: Advise on policies to facilitate orderly deleveraging and a return to a more sustainable and growth-enhancing level of financial intermediation, limiting adverse spillovers to other regions.
- Lead departments cited in Table 1: MCM, SPR, and (where relevant) FAD.
- Priority and timing from Table 1: High, Short-term, Additional resource needs: None.

### Assessing implications of ongoing global regulatory reforms (including G-SIFIs, shadow banking, OTC derivatives)
- Role: Fund to provide independent advice on, and assessment of, ongoing and planned reforms and their impact on the international monetary system; identify and monitor unintended regulatory spillovers and arbitrage, especially in emerging market and developing economies.
- Important issues going forward include shadow banking, “too-important-to-fail” financial institutions, and OTC derivatives reform.
- Lead departments cited in Table 1: MCM with RES.
- Priority and timing from Table 1: High, Short- to medium-term, Additional resource needs: None.

### Cross-border linkages and spillovers
- Objective: Deepen understanding of the nature and implications of cross-border linkages and spillovers by building on existing spillover work (event studies and model simulations) to quantify transmission of macroeconomic or financial shocks across borders and sectors.
- Additional focus: Analyze interlinkages between countries in the same “cluster” of closely interconnected financial economies; surveillance of offshore financial centers or global financial hubs could be undertaken systematically.
- Lead departments cited in Table 1: MCM, RES, and SPR.
- Priority and timing from Table 1: High, Short- to medium-term, Additional resource needs: None.

### Role and effectiveness of monetary policy in the current economic downturn
- Issue: Persistence of financial sector and sovereign vulnerabilities in advanced economies, very low (or even negative) interest rates, low or negative growth rates, and very high unemployment rates pose challenges for conduct of monetary policy.
- Analytical need: Further analysis to identify which policy tools would be most effective if further monetary easing is necessary.
- Lead departments cited in Table 1: MCM and RES.
- Priority and timing from Table 1: Medium, Short-term, Additional resource needs: None.

### Sustainable financial deepening in countries with shallow financial systems
- Objective: Facilitate well-managed financial deepening in emerging market and low-income countries to engender greater resilience, enhance policy effectiveness, and support strong, durable growth while managing risks from deepening (interconnectedness, unregulated innovation, “too-important-to-fail” institutions).
- Collaboration: Work in collaboration with the World Bank, with a focus on financial development that contributes to growth and poverty alleviation, as well as stability.
- Lead departments cited in Table 1: ADs, with MCM, RES, and SPR.
- Priority and timing from Table 1: Medium, Short- to medium-term, Additional resource needs: None.

### Exit from extraordinary macrofinancial policies
- Objective: As the global crisis unwinds, assist members in the exit from extraordinary measures (such as quantitative monetary easing) while avoiding new distortions and vulnerabilities or ill-timed exits that may extend recessionary conditions.
- Preparedness: Fund should be prepared to advise membership on exit strategies to avoid damaging spillovers as the crisis begins to abate.
- Lead departments cited in Table 1: ADs, with MCM, RES, and SPR.
- Priority and timing from Table 1: Medium, Medium-term, Additional resource needs: None.

### Action 2 — Innovate and foster an integrated view of financial sector risks
- Main objective: Systematically integrate risk assessments across multilateral and bilateral Fund products and instruments (GFSR, WEO, Fiscal Monitor, Article IV reports, FSAPs, spillover reports, and others).
- Proposed measures to ensure integration in Article IV Consultations:
  - Incorporate analysis from multilateral products into analytical work underpinning bilateral policy recommendations.
  - Prepare a list of key global risks and their probabilities distilling findings from multilateral analyses; country teams to consider how these risks might transmit domestically and generate spillovers.
  - Ensure FSAP recommendations are followed up and reported consistently in Article IV consultations.
  - Conduct pilot studies in low-income countries to focus on linkage between financial deepening, macroeconomic policy effectiveness, and volatility.
  - Greater follow-up on the quality and coverage of financial sector data for surveillance.
  - Closer cross-departmental cooperation and assignment of financial sector experts to all S25 teams.
  - Enhance coverage of financial spillovers in Article IV consultations as a consequence of the 2012 Integrated Surveillance Decision.
- FSAP frequency and synergies with Article IVs:
  - Conduct higher frequency FSAPs or FSAP stability modules for countries that request them and are deemed vulnerable (including those flagged in vulnerabilities exercises).
  - Consider dedicated discussions of FSSA issues in Article IV board discussions for S25 countries.
- Deepen culture of integrated risk analysis:
  - Consider developing a global risk map to operationalize two-way integration of multilateral and bilateral risk analysis and to identify build-up of risks across sectors, borders, clusters, and time.
- Move towards cluster-level financial surveillance:
  - Network analysis showed clusters of financially interconnected countries with offshore centers or global financial hubs often as “gatekeepers”; more surveillance could be conducted at cluster-level.
- Lead roles in Table 1 for Action 2 items include ADs, MCM, RES, SPR, FAD; priority for strengthening financial surveillance within Article IV consultations: High, Short- to medium-term, Additional resource needs: Yes.

### Action 3 — Increase traction by engaging more actively with stakeholders
- Strategic aim: Translate analytical findings and country experiences into actionable policies and best practices, promote policy dialogue on systemic issues, “speak truth to power,” and closely engage a wide spectrum of stakeholders (national authorities, multilateral bodies, private sector, macrofinancial risk bodies).
- Specific roles and activities:
  - Serve as the global facilitator on macroprudential policy by regularly convening academics, practitioners, and macro- and microprudential authorities (formal high-level meetings or technical working groups/taskforces).
  - Promote better coordination between macroeconomic policy makers and microprudential supervisors.
  - Contribute to the global regulatory reform agenda leveraging the Fund’s standards assessment experience and near-universal membership; Fund participation in the FSB and standard-setting bodies provides opportunity to influence debate.
  - Deepen collaboration with the World Bank on financial sector work, especially in LICs, via the Financial Sector Liaison Committee (FSLC) to plan and manage joint FSAP work program and help cover gaps in FSAP coverage and frequency for less systemically important countries.
  - Maintain and deepen momentum for filling data gaps on financial soundness, national and cross-border interconnectedness in coordination with the FSB and an interagency group (IAG) involving BIS, ECB, Eurostat, OECD, UN, and World Bank under the 2009 G20/IMFC Data Gaps Initiative (DGI).
  - Engage proactively with newly created systemic risk authorities and develop a role for the Fund as a global systemic risk advisor, partnering with bodies such as the FSB and fostering closer dialogue between national authorities.
- Lead departments cited in Table 1 for stakeholder engagement items: MCM, RES, SPR, EXR, LEG, STA, ADs; priorities range High to Medium with Short- to medium-term horizons.

### Box 1 — Addressing Data Gaps for G-SIFIs (selected progress and timelines)
- Final templates targeted for completion by end-2012, including on the institution-to-aggregate (I-A) data, incorporating feedback from ongoing consultation with the industry.
- A Memorandum of Understanding is expected to be signed by participating authorities by end-2012, including governance arrangements for data sharing.
- The first phase of data collection and sharing among supervisors is to begin in March 2013.
- Note on Fund access to G-SIFI data: Fund’s Articles of Agreement require members to provide information necessary for surveillance but do not oblige disclosure “in such detail that the affairs of individuals or corporations are disclosed.” Member countries frequently share confidential supervisory data with the Fund in the context of FSAP assessments on a voluntary basis; within the FSB initiative the extension of data sharing to other official sector bodies (including the Fund) will be decided in early 2013.

### Implementation priorities, time horizons, and resource implications (summary from Table 1)
- Time horizon definitions used in Table 1:
  - Short-term indicates a period of up to two years.
  - Medium-term indicates a period of up to five-years.
- Selected entries (priority — time horizon — additional resource needs — lead responsibility):
  - Deepen analysis of macroprudential policies — High — Short-term — None — MCM and RES.
  - Develop a comprehensive approach to managing capital flows — High — Short-term — None — SPR, with MCM and RES.
  - Advise on policies to contain sovereign-bank feedback loops — High — Short-term — None — MCM, SPR, and (where relevant) FAD.
  - Deepen analysis of cross-border linkages — High — Short- to medium-term — None — MCM, RES, and SPR.
  - Assess implications of regulatory reform — High — Short- to medium-term — None — MCM with RES.
  - Strengthen financial surveillance within Article IV consultations — High — Short- to medium-term — Yes — ADs with MCM.
  - Conduct more frequent FSAPs for vulnerable countries and LICs — High — Short- to medium-term — Yes — MCM.
  - Serve as the global facilitator on macroprudential policy — High — Short-term — Marginal — MCM and RES, with EXR.
  - Address data gaps and improve data provision for surveillance purposes — High — Medium-term — Depends on modalities — MCM, SPR, and STA.
- Footnotes in Table 1:
  - “None” means existing resources will be reprioritized, or processes or products will be streamlined.
  - Area departments (ADs) play a key role in shaping policy lines given their operational experiences.

*International Monetary Fund — The IMF’s Financial Surveillance Strategy*

### 18.      There are many challenges that the Fund will face in implementing the financial

### _082812 - 18.      There are many challenges that the Fund will face in implementing the financial

### Major challenges in implementing the financial surveillance strategy
- Developing a unified theory for macrofinancial linkages is likely to be a long-term endeavor; in the meantime the Fund will continue to build on a variety of analytical approaches.
- Enormous challenges in conducting empirical analysis on systemic risk due to data gaps.
- Reliance predominantly on a cooperative approach and persuasion to gain traction in surveillance.
- High and rising demands on the Fund’s services while resources are limited.
- Without greater traction with key stakeholders the Fund cannot perform its role effectively.

### Progress and analytic framework
- No comprehensive model yet exists that properly takes into account the complex linkages between the real and financial sectors; empirical estimates of these linkages are similarly uncertain.
- Partial equilibrium models and sectoral studies offer important insights but do not provide comprehensive quantitative guidance for policy design.
- Providing quantitative guidance for the design of economic policies is difficult; this is a challenge for Fund staff and for the economics profession at large.

### Data gaps and initiatives
- Making further progress depends critically on filling information gaps.
- The G20/IMFC Data Gaps Initiative included 20 recommendations to address these gaps.
- Important progress has been made by the IAG, including in defining templates (posted on the Fund’s website) for reporting country-level sectoral data to help identify strains in the household and corporate sectors.
- The proposed introduction of the SDDS Plus will also help.
- Maintaining and deepening the momentum of these efforts is critical for better systemic risk identification at national and multilateral levels.

### Surveillance scope, traction, and engagement
- The Integrated Surveillance Decision clarifies the scope of multilateral surveillance and makes analysis of all types of financial spillovers a more central part of surveillance and a primary focus of Article IV consultations; it does not alter members’ obligations.
- The Fund must continue to rely on a collaborative approach and persuasion, fortified by candor and evenhandedness.
- Increasing traction requires commitment from national and multilateral authorities to engage proactively with the Fund and support its independence in conveying tough messages.
- Success requires statesmanship by authorities to look beyond national interests and to tackle powerful vested interests.

### Demand, resources, and proposed cost estimates
- Demand for rigorous analysis and monitoring rose sharply since 2008; staff financial expertise has been diverted to crisis management.
- Coverage in Article IV discussions of financial sector issues has risen, and the number and complexity of FSAPs (with greater inclusion of advanced economies) has risen.
- Significant resources have been devoted to supporting global regulatory reform, including an almost doubling of staff attendance at the FSB and standard-setting agencies since 2007.
- Some additional demands could be accommodated within the current budget, but pursuing the full strategy will require decisions to reallocate work or augment resources.

Costs to implement proposed actions in three specific areas (exact figures preserved):
- Strengthening and mainstreaming financial surveillance in Article IV consultations:
  - Initial incremental need: of the order of 20–30 FTEs, at a cost of about $7–10½ million per annum.
  - Steady-state level thereafter: around 10-15 FTEs (or $3½–5¼ million) per annum.
- Increasing the frequency of FSAPs to vulnerable countries:
  - Present capacity: 15–20 FSAP assessments per annum.
  - Assumed increase: three to five additional assessments per annum.
  - Additional resources needed: approximately $4–6 million per annum.
  - Effect on frequency: increasing the number of FSAPs by an additional three to five per annum would allow an increase in the frequency of assessments for non S25 countries from (on average) once in every 11–16 years to once in every 8–13 years.
- Increasing traction by engaging more actively with stakeholders:
  - Scaling up outreach activities, including for travel, could be of the order of up to an additional $1 million per annum.

### Expected near-term outcomes and limits
- Given these challenges, the Fund may not be able, in the next 3–5 years, to prevent systemic crises, but it will improve its role to:
  - Sound the alarms early.
  - Make the financial world a safer place.
  - Mitigate the costs of crises when they materialize.
- It is not possible to identify with confidence crises averted by the Fund’s advice or to measure benefits to countries already in crisis, but the Fund has come a long way in highlighting vulnerabilities, providing early warning signals, and contributing to global regulatory reform.

### Accountability and departmental responsibilities
- Responsibility and accountability for financial surveillance is shared across the Fund. Lead responsibilities include:
  - Improving risk identification and macrofinancial policy analysis:
    - Monetary and Capital Markets Department (MCM) takes the lead on financial stability, macroprudential and microprudential policies, and capital market developments.
    - MCM, Research Department (RES), and Strategy, Policy and Review Department (SPR) lead analytical work on vulnerabilities, macrofinancial linkages, and interconnectedness.
    - Legal Department (LEG) provides expertise on legal issues relating to the financial sector.
    - Policy issues (capital flows, sovereign/financial feedback loops, exit from extraordinary macrofinancial policies) are joint responsibilities of MCM, RES, and SPR (and Fiscal Affairs Department (FAD) where relevant), informed by area departments.
  - Fostering an integrated view of financial sector risks:
    - Area departments are responsible for bilateral surveillance; MCM supports Article IV teams and conducts FSAP assessments.
    - SPR ensures Article IV reports integrate relevant financial sector issues, follow up on FSAP recommendations, and develop financial surveillance modalities.
    - Achieving effective integration of bilateral and multilateral financial risks is a shared responsibility of MCM, RES, SPR, and area departments.
  - Engaging more actively with stakeholders:
    - External Relations Department (EXR) supports effective communication.
    - Area departments, with support from functional departments (including EXR), have primary responsibility to liaise with national authorities.
    - MCM (FSB and standard-setting bodies), RES (G20 MAP), and SPR (G20) take the lead at the multilateral level.
    - Statistics Department (STA) leads in closing key data gaps for effective surveillance.

### Assessment, reviews, and accountability framework
- Fund Management has established a new accountability framework for departments to review alignment of departmental objectives with the strategy.
- Executive Board review opportunities:
  - Brief progress report for the Triennial Surveillance Review at the time of the 2012 Annual Meetings.
  - Periodic reports to IMFC and the semi-annual work program.
  - The 2014 FSAP Review and the 2014 Triennial Surveillance Review.
  - Opportunity to affirm the importance of financial surveillance in the context of the next medium-term budget.

### Issues posed for Directors (questions for discussion)
- Strategy:
  - Do Directors support the overall strategy as set out by staff?
  - Do Directors have views on the relative importance of the three elements of the proposed strategy: (i) improving effectiveness and impact of financial sector policy advice through strengthened risk identification and policy analysis; (ii) deeper integration of bilateral and multilateral risk assessments; and (iii) more active engagement with a broader range of stakeholders?
- Challenges:
  - What are the key challenges Directors perceive in implementing the strategy?
  - Do Directors agree that addressing analytical gaps in macro-financial and cross-border linkages, data gaps, resources, and traction with stakeholders will be critical?
  - Views on the relative importance of these challenges?
- Traction:
  - Do Directors agree that more “truth-telling” would be helpful in mitigating risks and that there may be scope to better engage key stakeholders to advance traction?

### External expert input — summary of key points from consultations
- Role of the Fund:
  - Experts stressed leveraging the Fund’s analytical rigor, independence, cross-country experience, wide network, and ability to field teams to many countries at short notice.
  - Importance of frank, open, and even-handed assessments, including for large and systemically important countries.
- Analytical and policy priorities identified by experts:
  - Systemic risk measurement: Fund should lead in designing measures of systemic risk, focusing on feedbacks between financial stability, microprudential policies, and economic growth.
  - Cross-border issues: Focus on policies to address risks from capital flows, interconnectedness, opaque derivative structures, and resolution of complex cross-border “too-important-to-fail” institutions (in cooperation with FSB and national authorities).
  - Macroprudential policy: Fund should play a central role in facilitating a global consensus on instruments and institutional bases and define “best practices” for macroprudential tools and frameworks.
  - Financial deepening: Scope, especially with the World Bank, to promote the role of the financial sector in growth and development while questioning whether a larger and more leveraged financial sector is always beneficial.
  - Microprudential issues: Not an area for the Fund to lead, but FSAPs can point to gaps in prudential supervision and assess macroeconomic/growth implications of regulatory reform.
- Instruments and products:
  - Article IV consultations / FSAP: Bilateral surveillance is viewed favorably but would benefit from greater integration of financial sector issues; a bridge is needed between annual surveillance and in-depth FSAPs for more frequent systemic risk assessments.
  - Early Warning Exercise (EWE): Useful forum but room for improvement, including better distinction between baseline and tail risks and more continuous dialogue and risk assessment.
  - Global Financial Stability Reports (GFSR): Praised for candor, relevance, and analytical content; feedback between bilateral and multilateral surveillance could be strengthened; proliferation of multilateral instruments risks diluting impact.
- Engagement:
  - Traction: Tension between “telling truth to power” and being a “trusted advisor”; delivering tough messages privately first and publicly later when necessary was emphasized; importance of sufficiently early warnings.
  - Messaging: Reports need strong analytical content and compact, relevant, digestible messages given top decision makers’ information overload.
  - FSB/IMF roles: Avoid unnecessary duplication; Fund should leverage macrofinancial expertise and “external” auditor role; FSB should lead in designing regulatory reforms while Fund analyzes macroeconomic impacts and implementation progress.
  - Role vis-à-vis standard setters: Fund involvement is important given its role in assessing compliance with international standards (for example, in FSAPs).

- Interlocutors consulted included: Montek Singh Ahluwalia, Agustín Carstens, Jaime Caruana, Charles Goodhart, Stefan Ingves, Simon Johnson, Tiff Macklem, Ravi Menon, Raghu Rajan, and Paul Tucker.

*Source: _082812 - 18.      There are many challenges that the Fund will face in implementing the financial*

### Appendix 2: Innovations and Remaining Gaps in IMF Financial Surveillance

### Appendix 2: Innovations and Remaining Gaps in IMF Financial Surveillance

### A. Evolution of Analytical Approaches
- Innovations strengthened the Fund’s policy advice on financial stability through analytical advances and by building knowledge of financial markets and specialized staff experience.
- Toolkit development for systemic risk assessment progressed along three tracks:
  - Financial sector vulnerabilities:
    - Shifted from static and backward-looking indicators to forward-looking tools assessing contagion and the role of systemically important financial institutions (SIFIs).
    - Analyses may: (i) address buildup of vulnerabilities at the global level (for example, acceleration of deleveraging in Europe) or at a local level; (ii) involve sensitivity analyses for single or multiple risk factors (for example, the impact on emerging markets of both deleveraging and high oil prices); (iii) combine high- and low-frequency data (for example, balance sheet with market data to conduct Contingent Claims Analysis (CCA)); and (iv) conduct financial sector stress tests, on a bottom-up (run by individual financial institutions) or top-down (run by the central bank, financial supervisor, or IMF) basis.
  - Macrofinancial linkages:
    - Efforts to integrate finance and macroeconomics have increased, but a unified macrofinancial framework is still lacking.
    - The Fund is building models incorporating financial sectors, conducting empirical work, identifying stylized facts, and developing “best practices” in assessing systemic risk.
    - Analyses of asset price and credit booms and busts and balance sheet analysis provide frameworks for understanding accumulation of financial stress; frameworks are also being developed for low-income countries in collaboration with the World Bank.
  - Cross-border dimensions and global risks:
    - Financial surveillance is placed in a broader cross-border context to assess international risk transmissions and inform international policy coordination.
    - New approaches include network and cluster analysis to identify linkages, “gatekeepers,” and country “clusters” most relevant for regional and global financial stability.
- New policy themes emerging from crisis lessons:
  - Macroprudential policy: policy tools to complement macroeconomic and microprudential policies to directly address risks to financial stability.
  - Financial regulation and supervision: embedding a cross-border dimension in national financial sector policies; involvement in developing more comprehensive financial sector standards and related assessment methodologies.
- Remaining gaps:
  - Need for a more comprehensive and integrated approach to risk analysis, especially at the global level.
  - Current toolkit provides only partial coverage of key risks and cross-border linkages, tentative signals on likelihood of materialization, and early warning signals that are not fully reliable.
  - Further work needed to strengthen macrofinancial oversight and incorporate cross-border linkages into policy analysis.

### B. Development of the Fund’s Instruments and Products
- Instruments and products have changed significantly; key elements include:
  - Article IV Consultations:
    - Now contain substantive discussions of financial sector issues; vulnerability analysis depth improved.
    - Stress tests increasingly included; Risk Assessment Matrices (RAMs) used to highlight key risks with likelihood and potential impact.
    - Advanced economy reports advise on systemic liquidity, preventing excessive deleveraging, and firewalls.
    - Emerging and developing economy advice focuses on volatile capital flows, overheating, asset price bubbles, and rising financial sector vulnerabilities.
    - Inclusion of financial soundness indicators has become standard; discussion of inward spillovers included; outward spillovers discussed for large economies.
  - Financial Sector Assessment Program (FSAP):
    - In-depth assessment of financial stability risks, oversight, and crisis preparedness using quantitative and qualitative analyses.
    - Innovations since 2000: more candid and transparent assessments, greater emphasis on spillovers (liquidity risks, sovereign sector, nonbanks), deeper crisis management and supervisory analysis.
    - Regional FSAPs conducted (examples: ECCU, CEMAC, and next year in the European Union).
    - Modular FSAPs introduced in 2010; in 2011 mandatory financial stability assessments under Article IV for the S25 jurisdictions moved surveillance toward a risk-based approach.
  - Global Financial Stability Report (GFSR):
    - Provides a global perspective on systemic risks and vulnerabilities; draws on analytical approaches and stakeholder interactions.
    - Has shaped policy discussions on deleveraging, capital shortfalls, mortgage loan losses, shrinking safe assets, macroprudential tools, credit ratings, and central clearing counterparties.
    - Analytical depth, candor, and reach of GFSR assessments have increased over time.
  - Vulnerability Exercises (VEs):
    - Semi-annual vulnerability assessment exercise introduced in 2001; bottom-up internal cross-departmental assessment of single-country vulnerabilities.
    - Initially focused on emerging markets; extended in 2009 to advanced economies and in 2011 to low-income countries.
    - Increasing coverage of special topics and cross-cutting themes relevant to global financial stability.
  - Early Warning Exercise (EWE):
    - Joint IMF-FSB mandate started in 2009 to identify countries’ vulnerabilities to tail risks with high systemic impact, ensure candid risk identification, and improve traction by delivering messages directly to policymakers.
    - Objective is to conduct "what-if" and "flag-raising" exercises rather than predict probability or timing of crises.
    - Fund Management and the FSB discuss EWE results with high-level policymakers every six months.
  - Spillover and Interconnectedness Reports:
    - Produced since 2011 for selected countries to analyze outward spillovers and cross-border consequences of developments in systemically important countries.
    - Advances in network analysis and interconnectedness discussed by the Executive Board.
- Need for better integration and leveraging of instruments and products:
  - Past focus mainly on augmenting country-level analysis with global macrofinancial transmission considerations.
  - Internal working groups established since 2008 on multilateral surveillance, financial surveillance, capital flows, macroprudential policies, and crisis mitigation.
  - Greater scope exists to integrate bilateral and multilateral work in instruments and products, facilitated by the adoption of the Integrated Surveillance Decision in June 2012.

### C. Strengthening Relationships with Stakeholders
- International architecture changes:
  - Post-1990s reforms established the Financial Stability Forum (FSF), standards and codes initiative, and innovations in Fund instruments and surveillance.
  - The global financial crisis prompted extending and strengthening responses and improving inclusiveness; the G20 became a key player in financial policy reform.
  - The FSF transformed into the Financial Stability Board (FSB), responsible for coordinating development and promoting implementation of global regulatory, supervisory, and other financial sector reforms.
- Fund’s role and collaboration:
  - The Fund complements international fora with expertise and cross-country perspectives to address member concerns.
  - Fund intensified contributions through presence in key committees and groups of the FSB and standard-setting bodies (SSBs).
  - The Fund plays a key role in influencing regulatory reform debates and helping countries implement post-crisis reforms.
- Complexity and overlap in international bodies:
  - The international financial architecture comprises many bodies with sometimes overlapping responsibilities.
  - The FSB’s mandate includes assessing vulnerabilities affecting the global financial system and identifying actions to address them.
  - A large number of SSBs have taken on greater responsibility for monitoring implementation of regulatory standards; other bodies like the BIS and CGFS are important for identifying systemic risks and promoting policy responses.
- Need for greater traction with stakeholders:
  - Strengthening risk analysis, clear communication, and sound policy advice are necessary but not sufficient.
  - The Triennial Surveillance Review noted uneven traction across the membership and lower traction in systemic countries, where global impacts of shocks are significant.
  - Progress requires collective policy cooperation at the global level and enhanced peer pressure at the national level.
  - More effective communication strategies are needed to reach broader audiences.
  - IMF member countries need to support and promote the Fund’s role as an independent analyst and advisor.

*Appendix 2: Innovations and Remaining Gaps in IMF Financial Surveillance*

### Box 2. Key International Partners

### Box 2. Key International Partners

### The World Bank
- The IMF has worked closely with the World Bank in the FSAP process since it was introduced in 2000.
- Assessments are joint in all but the advanced countries, where the Fund takes sole responsibility.
- The two institutions also collaborate closely in providing technical advice related to financial sector deepening in emerging markets and low income countries.

### The G20
- The G20 established in 2008 an ambitious agenda for financial regulatory reform and surveillance.
- These initiatives have been grounded solidly in the Bank-Fund FSAP, which was assigned an important role in assessing adherence to the G20 financial reform agenda, including through a commitment by all FSB members to undergo an FSAP assessment every five years, and to disclose their degree of compliance with international standards by publishing the corresponding detailed assessment reports.

### The Financial Stability Board (FSB)
- The FSB was established in 2009, with a wide-ranging mandate for financial surveillance, regulatory policy coordination, implementation monitoring, and contingency planning.
- To enhance global crisis prevention and improve cooperation between the IMF and FSB, the G20 leaders mandated the establishment of an early warning exercise (EWE) in late 2008.11
- This involves joint reports by the IMF and the FSB to the Fund’s advisory committee—the International Monetary and Financial Committee (IMFC)—at its spring and fall meetings.
- At the Los Cabos Summit (June 2012), the G20 leaders endorsed recommendations for strengthening the FSB’s capacity, resources and governance, including its coordination role vis-à-vis other standard-setting bodies on policy development and implementation monitoring.
- The FSB has become an important partner in the Fund’s multilateral surveillance, while also helping promote Bank-Fund financial standards assessments.

### Standard-setting bodies
- The role of the major standard-setting bodies has also evolved considerably, including, in several cases, by taking on greater responsibility for assessing national progress in meeting their standards.
- The results of these assessments provide useful benchmarks for gauging the strength of supervisory and regulatory systems for a wide swath of financial systems, and a helpful input to the Fund’s own policy advice.
- Fund staff participates in a number of international fora with these bodies.

### The private financial sector
- Given the rising significance of large financial institutions, the volatility and volume of capital flows for emerging markets, and the growing impact of decisions by market participants on national economies, the IMF has increased its interactions with the private sector, including through a high-level Financial Institutions Consultative Group (FICG).
- IMF country teams routinely meet private sector participants during Article IV consultations.

*Source: Box 2. Key International Partners, excerpt from the IMF document.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_082812.pdf_